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College Professor needing Help Understanding the Problem with Bi-metalism

I am an American Goverment instructor, and want to expose students to the real American history, the problems with fiat currency, and central banking. I don't want to force my beliefs on my students, but the textbook is so biased in favor of the pro-central banking Hamiltonian vision that I feel compelled to share the other side.

Here is the problem. In my research, I have discovered that populists in the late 19th century felt oppressed by the de facto gold standard after the Coinage Act of 1873 left silver at a deflated price. I think Ron Paul opposes bi-metallism, correct? Why does he oppose it? The populists of the time seemed correct in their belief that the de facto gold standard was a friend to the wealthy but not the masses. Furthermore, the Coinage Act that ended bi-metallism in America was part of the reason for a major depression in 1873. Perhaps greater liquidity via bi-metallism would have been a safer way (as opposed to the issuing of Greenbacks for example) to prevent over-deflation in the economy at that time?

I see that Milton Friedman actually argued that bi-metallism had a been a good thing for the American economy, by promoting price stability. The irony is that the populist of his time, William Jennings Bryan was pro-bi-metallism while the populist of our time, Ron Paul, is for a strict gold standard. Anyone care to explain why the gold standard was better than bi-mettalism given the pain it caused so many of those outside of the elite?

How would a gold standard not cause the same pain if our movement was able to get it passed? It seems to me that bi-metallism is truer to the concept of competing currencies and that it is superior cause it does not favor the rich over the masses.

Please share your views and please offer references to help me understand this phenomenon better. In addition, if you have seen Bill Still's The Secret of Oz, please share your opinion. I find the pro-Silver interpretation of the Wizard of Oz fascinating as well, and think it could serve as a great way of explaining the downside of allowing banks to monopolize money. It is too bad that he focuses so much energy on advocating for fiat currency. Then again, maybe he has a point when he says it is not what backs money that is key, but rather who decides how much of it there will be.

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I'm with Hoppe I think

I'm still studying, but one of the problems of the competing currencies in the past was possibility of local manipulation of the economy. Basically, the richest guy in town creates his own currency, and forces everyone to use it - Basically script issued by company stores. Then one individual could manipulate the value of the script to their advantage. Other times, individuals would offer currency, buy things up with it, and then let it go bust.

Similar things can happen with government currencies too, but in principle, one stable trusted currency would be better than competing currencies, since it would avoid the work required to choose the best currency for yourself, and the risk of loosing money from a bad decision on currency is reduced. In a nutshell, we have tried competing currencies, and so far Gold has won.

sorry, but you must not be an

sorry, but you must not be an austrian... Hayek advocated competing currencies to destroy fiat money and eventually the free market would decide which was the best... no government included. Meaning... no gold standard.

Hahahahahaha....

A "free market" with trade values imposed by Govt. Hahahaha! :D

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~wobbles but doesn't fall down~

Hoppe is an anarcho-capitalist...

...if he's spoken in favor of the gold standard, he's merely talking about defining the dollar as a weight of gold, with no role for the government in monetary affairs whatsoever.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Well...

From memory, I know that Hoppe says the Govt should stay out of money altogether.

Austrian economists and ancaps sometimes comment that if Govts are existing they should be restricted to paying their debts in gold and/or silver to keep them honest and to prevent over-borrowing and over-spending.

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~wobbles but doesn't fall down~

Rothbard isn't saying...

that multiple commodity currencies can't coexist in a free market!

He says:

"A particularly important case of Gresham's Law was the perennial problem of the "standard." We saw that the free market established "parallel standards" of gold and silver, each freely fluctuating in relation to the other in accordance with market supplies and demands. But governments decided they would help out the market by stepping in to "simplify" matters."

If the Govt steps in and declares values of commodities then trouble ensue. The only thing markets do is discover trade values and it can't be messed with without nasty things happening when said market attempts to rediscover equilibrium.

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~wobbles but doesn't fall down~

Cyril's picture

Don't miss to check out Chris' materials

Don't miss to check out Chris' materials on historical aspects:

http://chrissilber.blog.com/

Not specifically centered on the bi- vs. mono-metal debate, but a lot of content on everything historical, in and out, throughout the various governments and monetary schools.

I really enjoyed his presentation at a meetup we had** in San Francisco two weeks ago, anyway.

'HTH,

** http://www.meetup.com/ronpaul-18/events/97167662

"Cyril" pronounced "see real". I code stuff.

http://Laissez-Faire.Me/Liberty

"To study and not think is a waste. To think and not study is dangerous." -- Confucius

I apologize

I left my book at the office, but Mises wrote an excellent piece on the problems with bi-metallism in Human Action. Im going to bring it home and copy it into a post for you. It focused on the problems in a fixed exchange rate between gold and silver. He covers Gresham's law as it will lead to increased government control in order to force the people to continue to use both metals. Mises outlines the role of government in a free and sustainable monetary system as no more than a publicly funded mint. People are allowed to use whatever currency that vendors will accept and they can bring their bullion to the government mint to be coined for universal acceptance in transactions. Anything more than that will lead to manipulation.

Ok, but then what would back

Ok, but then what would back the paper currency? Please clarify. Thanks!

Historically...

...each commercial bank issued its own banknotes backed by gold or silver. That is, a depositor goes to ABC bank, deposits $100 in gold coins, and receives $100 in ABC banknotes.

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

I appreciate the PDF

I actually looked for it before i posted but apparently didn't look hard enough. I also would agree that the banks would be responsible for backing their notes and that no real standard or official national currency would be necessary. It would also be necessary to pass a law restricting banks to one hundred percent reserve lending and backing of bank notes issued to protect the market from the volitility that can occur as a result of loose fiduciary money policy.

I appreciate the PDF

I actually looked for it before i posted but apparently didn't look hard enough. I also would agree that the banks would be responsible for backing their notes and that no real standard or official national currency would be necessary. It would also be necessary to pass a law restricting banks to one hundred percent reserve lending and backing of bank notes issued to protect the market from the volitility that can occur as a result of loose fiduciary money policy.

BTW, here's a PDF of "Human Action"

http://mises.org/document/3250/Human-Action

Also, Rothbard has a good treatment of bimetallism in "What Has Government Done to Our Money?" See: Part III, Ch. 5

http://mises.org/document/617/What-Has-Government-Done-to-Ou...

"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."

Here's the thing

Whether it’s a gold standard, or a silver standard and even a bi-metal standard........ They once existed for the expressed purpose to control the creation of credit.......specifically bank credit. Not all credit is created the same. If the credit is a self-liquidating loan, as an example, a farmer gets a loan in the spring to plant his crops and tends these crops throughout the growing season and at harvest he pays back the loan and hopefully has made a profit, then this is a productive use of capital and a proper use of banking credit. If the bank makes a loan for speculation in another market that results is non-productive use of capital or consumption, then these loans bring future demand to the present and a demand for resources that may give false signals to the market place while distorting price discovery. An example of this is government loans in the form of buying government bonds to cover deficits.

The question should be "controlling the expansion of non-productive credit" and that the self-correcting mechanisms of the gold standard on credit creation is the same self-correcting mechanisms of the market place between fixed weights of gold and silver.

Gresham's law states "bad money chases out good money". Which is really hording good money while bad money is in circulation? But if you think about it...... silver or gold don't become good or bad money unless the government debases it, by either clipping it or by re-minting it with some lesser base metal or by passing legal tender laws for the privilege of one money over another. If left alone in the market place silver and gold, even in times of over or undervaluation, due to an influx by a discovery or from trade imbalances, can co-exist peacefully, with prices of goods being the determining factor. Silver was used for smaller denominations and gold used in larger denominations. What would matter is a creditable clearing house, which could never be the government.

After all, money exist for only two reason .........Medium of Exchange and a Store of Value.

The Metal standard keeps the banks from over issuing banknotes per the amount of metal in reserve. The cartel of the Federal Reserve System takes the restraints away and by doing so they socialize the loses and privatize the profits. These is a lose lose for Liberty. I prefer to end the Fed, return to a gold/silver standard at the fix exchanged rate weight by discovery after two years’ time of freely trading and at that time fix the dollar/bi-metal weight to whatever the market has decided. Close all banks and remove them from the dead cartel and re-open under the “Free Banking System” advocated by Murray Rothbard.

Read his book “ The History of banking and money”.
He answers all your question.

Goldspan

Here's my opinion on the Bi-Metalism

I also share your view as I am aware of what you just wrote about. I would take it a step further and argue that you could have more than just silver and gold metallic standard. But also add in platinum and palladium too for a more reliable monetary system.

I too questioned just Gold as the standard. While I love Ron Paul and believe in the message, that doesn't mean that I agreed with everything that he said. I too have other views than his. Which is a healthy thing.

I do believe that the more precious metals we have comprising a monetary system that the more stable the monetary system would be. Adding other precious metals would be a major major plus in my opinion.

But it is ABSOLUTELY necessary that a "standard of weight and measure" be established for all these metals. And that is one role government would and should play.

With today's coinage, it's just a mixture of base metals that have no real worth and are NOT precious in any sense of the word as we would use it. It's a smidgen of a click away from pure physical fiat currency and digital fiat currency too. Since both can still buy goods and services through the forcing of legal tender laws!

With monetary standards completely wiped out in terms of "weights and measures" we are now sitting at the cusp of what could be and probably will be the greatest collapse in recorded financial history as we know and are aware of. And that will be devastating to much of anyone alive today in a developed world.

That being said, you should go ahead and teach about the "other side" since the books do appear to be biased toward central banks and fiat standards. Would love to hear how it turns out!

Love Liberty, be Vigilant

"Now the Lord is that Spirit: and where the Spirit of the Lord is, there is liberty" (2 Corinthians 3:17)

Faith in God will prevail all things!

If you feel compelled... then JUST SHARE YOUR VIEW

Seriously... just share your view if that's what you feel you need to do. You are right to say that the power control structure has definitely directed the biased view we have today towards illogical and irrational behaviour in the world of government and finance, without a doubt. That's what a rigged game looks like anyway. The thing becomes what do we do about it? I do believe you should share your view.

Love Liberty, be Vigilant

"Now the Lord is that Spirit: and where the Spirit of the Lord is, there is liberty" (2 Corinthians 3:17)

Faith in God will prevail all things!

I am showing them a lot of

I am showing them a lot of alternative stuff, dont worry lol.

My understanding an opinion of your question.

From all of my studies, research and obsession about economics and monetary systems here is my opinion:

I believe Ron's view on the matter was to have only one metal of certain weight to be called a "dollar". The reason is because if you make say .01 oz of gold worth $1 and .08 oz silver worth $1, this will create chaos because as we know .01 oz of gold will not always equal the value of .08 oz of silver and the values change. When the weight of silver increased in value compared to gold then citizens use gold and when the opposite occurs in the reverse scenario.

The issue of bimetalics was completely different in the 1800's. After the fall of the 2nd national bank, international bankers did their best to withhold gold from the union, and at the same cause all kinds of chaos by dumping goods on the south and causing the union to respond with tariffs, etc leading to the civil war.

Lincoln's response was the green back, a fiat government currency which solved the unions problem of a.) having no gold and hence no money and b.) breaking free from the international bankers who were trying to control both sides in the war. (on a side note the international bankers were deeply afraid Lincoln's move fearing that this would make America the most powerful and independent country in the world and that America's greenback system must be destroyed at all costs). The bankers responded to this threat by tinkering with the amount of gold available and by making silver and all other non gold metals non legal tender.

Jennings Bryant's move was an attempt to put another metal into the system and to thwart those who had hoarded gold. Interestingly Wilson only became president because WJB agreed to be his VP, but as we know Wilson stabbed him in the back with the creation of the Fed.

Therefore I wouldn't say that Ron and WJB were opposed on this matter, in fact they were very similar. Ron is all for allowing other forms of metal being legal tender, but only choosing one specific weight of a single metal as a "dollar".

A somewhat related tangent here but, going back to the original point about Lincoln and his economic policies. While many on this board will disagree, I thought Lincoln had one of the best economic policies in a time of crisis and overall was an economic genius. One issue I completely disagree with Dr. Paul is on the issue of tariffs. Tariffs were absolutely necessary at both the founding of the nation as well as prior to the civil war. While Alexander Hamilton was not always right (especially on banking), he nailed the concept of trade and his modifications on Smith's Wealth of Nations is impressive. But in my opinion the greatest American economist is Henry Carey (some of you may not have heard of him). I think he is the most balanced economist on trade, tariffs and credit.

One issue for the DP community think about is without tariffs would there have been an independent America? Or would have Brittan conquered us via manufactured goods and debt (as they did India, China, etc.)? Perhaps we are seeing the harmful effects today of a runaway monetary system combined with allowing countries all over the world hit us with tariffs and America not responding? Trade is a war always has been, when Europe slaps a tariff of 20% on American goods via a complex VAT tax scheme you must respond equally. Even Adam Smith advocated this response (as long as it was a sector in which your in economy was competitive). One last thought I leave you with is consider the countries that have the most favorable trade deals with us, Germany, Japan, South Korea, and China. Now what do they all have in common? That would be all four of those nations were strategic positions during the cold war, so you can tie in the Military industrial complex into that equation as well. My apologies for the unrelated tangent but I think we all should reexamine the issue of tariffs.

"What Has Government Done to Our Money?"

http://mises.org/money/3s5.asp

Bimetallism = government price fixing = violent intervention into the market

Bimetallism is a monetary standard whereby a government imposes a fixed (arbitrary) rate of exchange between two metals. If two metallic currencies freely compete in the market, that is not bimetallism.

A gold standard (while vastly more desirable than a limitless fiat currency) could very well be problematic for us non-elites - that's why Ron Paul calls for legalizing competition, to let the market choose the preferred currency. Perhaps gold would be chosen, or BitCoin, or tallysticks, or whatever - but such a decision would be a legitimate expression of individual preferences, rather than an act of arbitrary government coercion.

So would gold be the

So would gold be the standard, or could we let silver be the standard? This is what confuses me. It seems that making gold the de facto or by law standard disadvantages those who hold silver.

the answer is no laws. Let

the answer is no laws. Let silver and gold flucuate according to supply and demand and one will win out or maybe both will be use Volunyarily... so the answer is there is no standard. The government made up the standard and ruined our economy

So if there is no standard,

So if there is no standard, how would paper money be backed or represented? This is really confusing for me. With competing currencies, how would the government make sure paper had worth behind it? Would there usually be an ever changing mix of gold and silver and other commodities to represent that paper? So some years, there would be more gold in the mix, and other years, silver? I realize that some don't want government to issue currency, but assuming that wouldn't fly at this point, how would competing currencies allow for paper to be backed by real value?

Banks would issue notes...

against reserved commodities. Third party clearinghouses would pop up to keep track of the various banks issuances -- kind of like a ratings agency. The clearinghouses may also sell some kind of insurance to both the issuers and users of currencies to guarantee their ratings.

All of this happened during the Free Banking era which was the most economically stable period in US history.

Banks could issue currency notes against all kinds of commodities such as other metals, gems, minerals, land, trees, next year's crops, etc. etc.. Certain notes would be trusted for everyday consumer commerce and others more appropriate for transactions between manufacturers and suppliers and retailers.

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~wobbles but doesn't fall down~

Competing Currencies

chosen by the free market is what I think Dr. Paul favors now. But I guess you could ask him to be certain.

Competing currencies does not completely knock the government out of the loop since they could be active in enforcing contracts and punishing fraud. They could also publish lists of prior offenders...

Your right he would be for

Your right he would be for the market deciding what form of currency was best. A company issuing a currency would have to uphold there contract with the person trading goods for the currency ie having the specified amount of metal in there coin. If they breached there contract and the courts would then have a role enforcing contracts. Currencies could be anything (nails, cows) whatever currency had enough demand to sustain. My opinion would be never allow government to issue a currency even with competing currencies. The table is lopsided immediately with government being the apparatus to enforce its own contracts.

The problem is government control

Why impose any metal on anyone? Why not just let banks accept any standardised commodity they want as specie? This only works if fractional reserve banking is abolished and this is a privately controlled currency with legal competition. There need not be chaos thanks to debit cards that could be used for all transactions. Government could still set a standard by which a price would be fixed (not of any actual currency, but so that people knew the relative value) so that retailers would only have to post one price. Also, as long as it's unaffiliated with the government and there's no fractional reserve banking, fiat currencies like Bitcoin might be competitive as well. Ron Paul never spoke ill of private fiat currencies, but most Austrian economists don't believe that fiat currencies would be competitive in a free market so he probably never thought it worth mentioning.

Two Words:

Gresham's Law.

Bad money chases out good. By fixing both metals, you create an artificial ratio by fiat. What you would want to have is a currency unit fixed to X amount of gold or silver, and allow the other metal to float.

In the 1800's, when the ratio was fixed, the market price of silver went way up, but the ratio remained the same. People hoarded the silver or melted it down to trade by market weight, and quickly spent all of the gold (exacerbating the problem even more via supply and demand). Furthermore, Europeans would vacation to America on ships just so they could swap all of their gold savings over to silver and return home with a 40% premium.

It also opens the door for politically connected people to get the "good" money while the "bad" money gets issued into circulation. A congressman could ask for his pay entirely in freshly minted silver, at its fixed ratio of 1:11 to gold, and then go out and make himself a pay-raise by selling it off at market prices, which were much higher.

If you attempt to fix both metals, you create a distortion. The best this, if you HAVE to have a government minting money (which you don't in reality, because it always ends up just being fully monopolized and then the physical link gets pulled), you let them mint their coins in either gold or silver, and let private mints create the alternative money with whatever they wish. This also helps to keep everything in a sort of check and balance.

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Progress is precisely that which the rules and regulations did not foresee. - Ludwig Von Mises.

explanation

best way to describe bimetallism is a red herring concept over a one-metal standard.

It really dosen't matter either way, since the market price ratio of the two metals will not stay exactly what the gov't declares it to be. So what u have left is a de facto standard of only one of the two. US was founded with a bi-mettalic standard but was defacto silver standard. Gold was actually worth far more than the gov't offered for it at the mints, so nobody handed in their gold for gov't issued currency.

The rule was that the gov't will accept either metal on according to it's standard but will issue YOU whatever form it wanted to. So it was never motivated to ever issue gold. Hence, de-facto silver standard.

The controversy came later in the 1800s when the gov't policy was altered. This changed the country into a de-facto gold standard. During a time like this fortunes can rise and fall depending on the assets one holds.

Once u are on a metal standard, bi-metallic or uni-metallic the most honest thing to do is stay on it and not give in to the lobbyists who intend to profit from your policy change.

Grover Cleveland inherited a nation on the gold standard already. Many Free Silverites (holders of silver-related assets) wanted silver remonetized. This would have introduced a fiat element, so one could hand in a set amount of silver and receive a gov't issued amount higher than it's market value.

Cleveland said we're not going to issue you money that is worth higher than your silver, you have to buy it on the free market like everyone else.

Some say that this was already unjustly done in favor of the gold holders previously. That may be true but from Cleveland's perspective the damage was already done. By that point in history the rules were known and gov't action would have only redistributed wealth unfairly, from his perspective.

Hope this helps.

I'd agree with everything save the original bi-metal standard.

I don't read it that way.

The coinage act is pretty clear. They defined a Dollar or unit in terms of silver. They then minted Eagles, which they stamped in terms of dollars, and they specified the ratio.

Thus, they minted two metals but to one standard - the silver standard.

We weren't 'de facto' silver standard, we were also 'de jure' silver standard.

True bi-metallism would have defined some accounting unit as abstract, and then currently valued at some quantity of silver AND some quantity of gold.

They didn't do this.

They adopted a quantity of silver as the standard, and then priced everything else accordingly.